Much of the focus in obtaining tax exemption within a SMSF is to ensure that a member’s minimum pension has been met prior to 30 June each year. Where the minimum pension has not been met, the fund is not entitled to tax exemption on income generated by assets supporting the pension account (see article, “the treatment of minimum pension shortfalls”).
The minutes of the December 2010 meeting of the ATO NTLG Superannuation Technical Sub-Group Meeting have recently been released and focused on a similar issue of tax exemption, however where a member has drawn “excess” pension payments. Nowadays this typically only applies when paying a Transition to Retirement Income Stream (“TRIS”). It is noted however than some members continue to be paid defined benefit pensions or market-linked pensions which could also trigger excessive pension amount issues.
The issue raised within the NTLG meeting was “does an SMSF lose the exempt pension income exemption (i.e. 0% tax rate) on assets used to support the payment of a transition-to-retirement pension where the member draws down more than 10% (that is, the maximum amount) of the relevant account balance during the income year?”
The ATO’s initial view is that a tax deduction for exempt pension income will only apply where the pension standards have been met in form and effect. This is consistent with their views outlined in the minutes of 8 September 2009 that looked at this same issue regarding minimum pension shortfalls.
It is important to note that there is no specific scope within the definition of a ‘transition to retirement income stream’ in regulation 6.01, or in subregulations 1.06(1) and 1.06(9A) of the SISR for the definition of a pension to be met where the relevant payment requirements have been breached.
On the basis of guidance provided from the NLTG meetings on 8 September 2009 and 8 December 2010, it is imperative that pension amounts taken by a fund member fall within any minimum and maximum amounts imposed by the income stream.